RekaPacific Berhad (RekaPacific) was set up on 1 Mar 1968 under the name of Berjaya Kawat S/B and was listed on the KLSE on 2 July 1970. Berjaya Kawat changed its name many times, first to Berjaya Corporation in 1985, then to Berjaya Industrial in 1991 and finally settling with its current name on 30 July 1997. For many years, the group concentrated on making and selling wires & wire ropes, welded wire mesh & prestressed concrete strands. A major change in the board of directors and shareholders in mid-1984 led to RekaPacific diversifying into various industries, ranging from property investment & development to marketing & distribution of consumer durables to gaming. Under the new management, RekaPacific quickly became a conglomerate, with sales reaching the highest of RM2.5 bln in 1995. In late 1996, there was another change in the management, along with the arrival of a new substantial shareholder. Things quickly took a turn for the worse when the group suffered massive losses as early as 1997. An investigation carried out revealed criminal wrongdoings that were allegedly perpetrated by a former director and former solicitor. The damage done to RekaPacific was immense, with accumulated losses of the group totalling RM2.2 bln in 2002 and it became a PN4 counter on 26 Feb 2001.
Declining profit margins under old business
Under the old management, RekaPacific focused on manufacturing wires & wire ropes, welded wire mesh & prestressed concrete strands. Sales were growing steadily, but margins were low due to local and import competition. Tariffs on low carbon wire & wire products were lowered and sales of wire ropes was adversely affected by a slowdown in logging activities. With profit margins of around 1.2% at 1984, it was not surprising that control of the company changed in 1985-1986.
Massive expansion under new management
On 2 May 1984, several new directors were appointed. Led by Tan Sri Dato' Vincent Tan, RekaPacific then became a conglomerate with the following core activities: . Property development and investment. . General insurance and hire purchase, lease & loan financing. . Manufacturing and selling steel wires & related products and textile products. . Gaming, held through Sports Toto Malaysia Bhd, contributed significantly to the group's sales and profits, and was one of the most profitable ventures RekaPacific had embarked on. . Marketing & distribution of consumer durables, another major contributor to the group's sales and profits. . Investment & investment holding. . Leisure, tourism & resort.
To finance its expansion, RekaPacific undertook numerous exercises: . Rights issue in 1986 of 71.35 mln shares at RM1.00 each to finance its acquisition of a 48% interest in Regnis (Malaysia) S/B; . Issued 124.39 mln shares at RM1.50 each in 1987 to acquire a 51.8% interest in Sports Toto Malaysia Bhd for a total of RM186.59 mln; . Rights issue in 1989 of 210.01 mln shares at RM1.30 each to subscribe for more shares in South Pacific Textile Industries Bhd, acquisition of 9.84 mln shares in Sports Toto Malaysia Bhd; . A special issue of 79.78 mln shares at RM1.00 each to Bumiputra investors in 1993.
RekaPacific's capital ballooned from RM14.27 mln in 1985 to RM500.6 mln in 1993. Despite this, its borrowings increased every year from RM48.9 mln in 1985 to a staggering RM 2.04 bln in 1992. Although so many shares were issued, Berjaya Group, still remained as RekaPacific's holding company and Tan Sri Dato' Vincent Tan still retained a substantial interest in RekaPacific through his shareholdings in Berjaya Group.
A look at the financial results
Tables 1 and 2 show the performance of RekaPacific under Tan Sri Dato' Vincent Tan's stewardship:
Table 1: Turnover of core activities (RM mln)
Table 2: Pretax profit (PBT) of core activities (RM mln)
It is not hard to see that RekaPacific had expanded significantly compared to when it had only one core activity. However, of the numerous divisions, only its gaming and marketing & distribution of consumer durables made attractive profits. Property investment & development only turned in profits in 1994-1996. The manufacturing of steel wires & textiles recorded an erratic performance. Investment holding incurred massive losses from 1988 onwards due to RekaPacific's huge interest expenses which were absorbed under this division. Upon closer inspection of RekaPacific's financial statements, a curious trend emerges, as shown in Table 3:
Table 3: Financial Highlights (RM mln)
In every year from 1990-1996, RekaPacific made a gain on disposal of investments, comprising subsidiaries, associates and other quoted and unquoted shares. Not only was the gain on disposal of investments significant but the cashflows resulting from the purchase and sale of investments ran into billions of dollars for the 7-year period. RekaPacific's profit excluding extraordinary items was remarkably low, and by selling its investments in associates, subsidiaries, etc, the profit attributable to shareholders was boosted. One point worth noting is that RekaPacific did not segregate the current portion of its trade debtors from the long-term portion. While the breakdown was not available, this was not in compliance with the acceptable accounting standards and would have overstated its current assets. RekaPacific's current ratio was already weak, and the reclassification of trade debtors to non-current status would only further highlight the liquidity weakness. The group was also heavily geared and interest expense took a huge chunk of the pretax profit, resulting in its profit barely covering interest expense in certain years.
Change in management leading to massive share trading activities
On 26 Dec 1996, RekaPacific changed its board of directors once again when the major shareholders changed. Linksun Avenue S/B acquired 162.303 mln shares in RekaPacific, or a 32% interest, for RM568.1 mln cash, translating to RM3.50 per share. The closing price of RekaPacific on 25 Nov 1996, the date prior to the suspension in trading of RekaPacific shares, was only RM2.12. Thus, a premium of RM1.38 per share was paid. Why?
RekaPacific's core activities were then streamlined into 3 areas: strategic investments, financial services and property investment & development. The new management proceeded to sell a significant amount of its previous core activities, and engaged in share trading using margin financing facilities. Table 4 shows a summary of the material disposals made by RekaPacific and the acquisition of shares:
Table 4: Significant cash inflow/outflow
On the surface, RekaPacific sold its previous core activities to raise funds for the new acquisitions. RekaPacific paid RM8.50 and RM3.50 per share to acquire Kelanamas and Promet respectively, compared with their respective market prices of only RM4.78 and RM2.10. Kelanamas and Promet (Promet was featured in i Capital dated 26 Jun 2003) were linked to Dato' Soh Chee Wen, who had significant interests in these companies. RekaPacific also utilised margin financing for its share trading activities. When the Great Asian Crisis led to the collapse of the KLSE, RekaPacific was caught in the downturn. As a result, claims amounting to RM684 mln as at 2001 were made by the financial institutions and stockbroking firms against the group for its share trading activities.
When the preliminary results for financial year ending Apr 1997 were announced, it showed a net profit of RM13.4 mln. However, when the 1997 audited accounts were released, the results showed a massive after tax loss of RM1.5 bln. But the change in management and major shareholders only took effect in Dec 1996. How could such a calamity happened in such a short time ? It is indeed very puzzling to simple-minded folks like us that within 4-5 months, Rekapacific was ripped apart.
Investigation carried out revealing criminal wrongdoing
In Apr 1998, the directors and auditors found many unauthorised and irregular transactions in the group's accounts, mostly involving share trades. The directors then appointed professional advisers to conduct an extensive investigation, which was completed in Apr 2000, into the financial and legal affairs of RekaPacific. The investigation revealed that fraud and criminal wrongdoings were perpetrated by a former director and a former solicitor. Share margin and trading accounts were opened in 1997 purportedly in RekaPacific's name by means of false documents and misrepresentations. Some of the points raised from the investigations were : . A total of RM1.795 bln shares in 15 counters were purchased or redeemed-in but board authorization was sighted for only RM316 mln of the shares purchased; . A further RM518 mln shares were transferred into the account of RekaPacific for no known consideration and the source of the transfer was also unknown; . RM450 mln shares were transferred out, without board resolutions, for no known consideration; . Contractual agreements with 3rd parties, causing loss to the group due to non-performance of the counter-parties.
Summary of exceptional losses
RekaPacific suffered heavy losses as a result of their share trading activities, as shown in Table 5:
Table 5: Exceptional losses (RM mln)
RekaPacific proposed to restructure to regularize its financial conditions, but it could not proceed due to uncertainties as to the company's listing status arising from the decision of the KLSE and Securities Commission (SC) to de-list RekaPacific from the KLSE. Due to the investigation conducted on its share trading activities, RekaPacific's submission of annual reports was overdue for many years and RekaPacific had the unique distinction of issuing 5 annual reports from 1997-2001 in 2001. RekaPacific was publicly reprimanded by the KLSE and SC. The list of shareholdings as at 29 Nov 2001 showed that a total of 38,402 shareholders were each holding less than 100,000 shares. This is a huge number of investors and the truth of the matter has to be known.